Gold stumbled as USD recovered on hopes of less dovish FOMC minutes

calendar 07/04/2021 - 14:05 UTC

Gold (XAU/USD-spot) made an early Wednesday U.S. session low around 1730.78, stumbled almost -0.75% as the US dollar index recovered from Tuesday’s slump on hopes of less dovish FOMC minutes. Gold closed around 1741.88 Tuesday, jumped almost +0.78% as USD slips on signs of bond yield easing and a surge in EUR. The US dollar index (DXY) slips -0.25% as EURUSD surged almost +0.50%, USDJPY slumped around -0.30%, while GBPUSD stumbled -0.50%. Gold made a multi-day high around 1745.43. EUR got a boost as Eurozone may achieve herd immunity by 14th July (?).

As per reports, most EU27 countries will have sufficient COVID vaccine supplies to immunize the majority of people by the end of June’21. The EU aims to immunize 70% of adults by the end of this summer amid increasing supplies of COVID vaccines, while Germany, France, Italy, Spain and the Netherlands expect to fully inoculate more than 55% of their total populations. EU Commissioner Breton has said most of the member states will have the capacity to deliver enough doses to reach collective immunity by 14th July, provided the doses are injected.

EUR was boosted as the above projections provide some hope that the EU’s vaccination campaign will improve after a disastrous start dominated by delays, side effects, vaccine efficacy, and political fighting. EU’s COVID vaccine deliveries are anticipated to increase to about 360M doses in Q2-2021 from just over 100M in Q1 amid expected higher supplies by Pfizer-BioNTech as well as Moderna, and Oxford-AstraZeneca. Also, there will be fresh COVID vaccine supplies from J&J, Sanofi-GSK and Novartis-Pfizer JV. As of now the European Commission has contracted for 2.3B COVID vaccine doses and has had exploratory talks for another 260M doses. In the U.S., at the current rate of around 3M COVID vaccinations/day, almost 75% of the population may be inoculated by July’21.

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USD was under stress on signs of bond yield easing after U.S. Treasury Secretary Yellen batted for infra stimulus, while downplayed inflation. GBP slips on long unwinding despite visible flattening of COVID curve and gradual unlocking of the economy.

Bottom line:

By Dec’21, or even much before that, there may be widespread herd immunity on both sides of the Atlantic and by Mar’22, we may see almost full economic/employment recovery. In that scenario, Fed may go for gradual QE tapering from Dec’22 and rate hikes from Dec’23, subject to substantial progress and actual achievement of its dual mandate (maximum employment and price stability; i.e. 2.00-2.50% of core PCE inflation).

Gold may continue to be under stress on the progress of vaccinations & herd immunity (COVID), no further big monetary stimulus by Fed and other G10 central banks, no real concern about sustained inflationary pressure in the AEs due to structural issues. Moreover, huge infra/green stimulus by the U.S. and other G10 economies will be positive for currency (USD) due to reflation optimism and negative for Gold, despite the appeal of Silver as industrial metal amid infra/green stimulus.

Technical View: Gold –XAUUSD

Technically, whatever may be the narrative, Gold now has to sustain above 1765 levels for any further rally; otherwise, it will correct again in the coming days. As Gold does not generate any yield theoretically, being a hard commodity, a higher bond yield is negative for the yellow metal despite potentially temporary inflation.

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